BrotherMaynard

Beaten Down Natural Gas Likely to Stay Down, Making Producers a Short

"Although I do understand (and agree) that dollar weakness should act to support all commodities in general"

oil and the dollar have nothing to do with supply and demand. yes a euro can buy more dollars, and therefore buy more oil, but what about the people already holding dollars? A weaker dollar, in and of itself, means that they can't buy as much oil as before. Last time i checked, the dollar was the most pervasive currency on the planet. if you look at any period during the 90's, this dollar/oil inverse "trade" did not exist. i have an idea why it started picking up during the past few years, but i'm not going to say it, as its far from conclusive.

5 Reasons Natural Gas Is Poised to Bounce Back

toobad41...thanks for the details. very helpful.

despite all the rigs that are being laid down, it sounds like lots of wells are being finished and capped...after all, drillers pay for those rigs, they might as well use them. so i can't imagine it takes more than a few months to get those wells fired up once demand rebounds. starting from zero is one thing, but having 90% of the work done is another.

5 Reasons Natural Gas Is Poised to Bounce Back

Im guessing this piece refers to the US nat gas situation as the structural realities there are very different from other geographies.

Either way, this article is exceedingly vague, and is filled with platitudes that were once famous during the energy boom-bust of the last 6 or so years...it is this sort of faulty reasoning that has since lost lots of money for lots of people.

To quote article:

re: pts 1 and 2: "Most investors fail to look beyond this next week- even though, in most cases, their time horizon is much longer. They’re doing it again in natural gas right now...that’s why natural gas prices are so low right now."

and then the author totally contradicts himself with his next point

" When demand falls, prices fall. When prices fall, supply falls. It’s a basic rule of economics. Right now, the rules are hitting natural gas."

Well which is it? Is it investors or supply/demand moving prices? Both? Are you getting equities mixed up with commodities?

Equities suffer from extrapolation bias that klarman refers to, given that they are the present value of future earnings. But a commodity is the present value of...well...its spot price. There are no future cash flows in a commodity. Again, extrapolation bias does not even apply to natrual gas much less any other commodity. Now it applies to natural gas-driven equities. But if we're talking about risking hard-earned capital on an idea, don't you think we should at the very least get the most basic characteristics of the vehicle correct?

re: pt 3: "It’s rare to find oil in the ground without natural gas. And vice versa"

This seems to be one of those vague assertions backed with no data.

US natural gas production from shale has spiked (see here: tonto.eia.doe.gov/dnav...) while US crude prodution has flatlined (see here: tonto.eia.doe.gov/dnav...).

"History shows, when oil prices rise, natural gas prices follow "

Obviously no data to back this one either.

So the most recent example shows that the "btu relationship" certainly didn't hold on the way down. Last Oct Nat gas was $8 and crude was still hovering around $100. There was plenty of talk rife with the notion about how nat gas would appreciate back to 12-13 right quick and close the "btu gap."

Obviously that's not what happened. Oil tanked in half from $100, thus following nat gas' lead on the way down. So what's to say nat gas at 3.75 isn't pre-saging $25 oil?

The point is, there is a lack of wide-spread infrastructure that allows switching between nat gas and oil (in the US) to create any sort of correlation that which investors can have any conviction in...so why get fancy when you clearly don't have the tools? Just use GDP as the common denominator.

Again, the narrowing of the crude/ng gap is an awful reason to risk capital.

"There are many ways to protect and actually increase your wealth during periods of inflation...One of the best way is to own real assets."

Based upon the authors reasoning for investing in commodities, thus far, it would be more wise to stick to TIPS as an inflation hedge.

"Natural gas will be a clear benefactor of the cap and trade legislation"

So invoking klarman's quote again...what's to say this isn't the extrapolation of the current administrations' leanings into a permanent change in the future of the US' energy consumption mix? What if obama is gone in the next 4 years, and we just get a slow and measured approach to energy consumption change? What if it costs too much? The point is, to assume that cap and trade is in the bag is absolutely ludicrous. It is this sort of presumptuous banter that will put you at more risk than you otherwise should be.


two questions that the author might want to consider:

What are the effects of LNG on the future of the US nat gas complex?

Does the falling margins of energy service companies, and thus, the falling cost for E&P's have anything to do with E&P's future profitability and/or incentive to drill?

Oil Is Years Away from a Meaningful Recovery

"It seems likely that the world needs US$75 to US$100 per barrel oil to encourage long term supply."

I don't understand why this holy rote is constantly spewed.

Using today's cost structure, that price range would be true. But if you look at the margins of nearly every oil service stock, they have triped and quadrupled over the last cycle (~5-6 years). there is no doubt those are coming back down (in half or even by 2/3rds), and with it, the cost of e&p and thus, the cost of the marginal bbl of oil. unconventional locations (deep offshore; oil sands) will still remain relatively high, but the tide is now shifting to the point where suppliers and servicers have lost all pricing power, and with it the cost structure of E&P's. The current cost of materials is still in the $75bll range, but keep in mind, the downturn in oil is but 6-9 months old (it started in July/August 08)...so in another 6-9 months, don't be surprised to see costs cut in half, to the point where new explo is feasible at $40 and $50bbl.

Oil Rises Again: What Does it Mean?

higher prices are not the result of anything fundamental. we still have massive oversupply, evidenced by the 80m bbl floating offshore; Cushing filled to the brim; ballooning OPEC spare capacity and awful demand numbers.

the bounce is dumb money flowing into etf products in the hopes of getting in on the "dollar weakness" trade. This trade is, in and of itself, ludicrous, as oil's appreciation is due to nothing more than paper chasing paper.

In fact, I would argue that these higher oil prices are going to impel the speculative oil that is in storage to be dumped on to the spot market, putting abnormal pressure on spot prices. The evidence of this could be found in the weekly EIA reports, which would likely show a downtick in cushing supply, but abnormally large overall builds in commercial stocks.

Until there is a genuine uptick in demand, oil is going to have a tough time sustaining itself above $50 for any multi-week period of time.

The Great American Driving Reduction Continues

fyi...you put up the chart that shows "through Jan 2008"

Commodities Will Lead the Recovery - Matt McCall

"That represents an awful lot of lead, copper and steel. And oil to keep them running. To boot they now have cheap money to buy."

be careful when extrapolating data points during periods of tumult. 1st - that growth rate is off a seasonally weak base as feb last year had a handful fewer days given the timing of the new year holiday. 2nd - that's in addtion to taxbreaks and stimulus that would stimulate the dead to get up and walk. 3rd - keep in mind that china's 25% increase is more than offset by the 35%-45% decrease in US auto sales, as the US auto market is several times larger than china's.

(china is indeed selling more cars than the US, on an absolute basis...but it is not a sustainable trend...given that at near flatline levels, the US still moves 650k cars vs. China's "record" pace of 850k vehicles.)

Regarding "oil to keep them running"...during Jan and Feb of this year, China exported the most diesel (their fuel of choice) in over a decade amidst weak demand and oversupply. Going back to the deatils about passsenger cars...engines under 1.6 liters accounted for 70% of the passenger vehicle market...so these vehicles are not exactly caddies guzzling 10mpg (no offense to caddies).


diesel article: news.alibaba.com/artic...

70% car stats article: www.google.com/hostedn...

Commodities Will Lead the Recovery - Matt McCall

consumption is the match that ignites inflation. without a decent level of growing consumption there is no inflation. The reason why there is not a growing level of net consumption is because the financial system is in ruins. That is why financials will lead us out of this mess. Until financials show some semblance of normalized health, we are going nowhere.

And just using common sense, financials led us in to this mess, starting all the way back in early 2007. In fact, if everyone recalls, commodities didn't tank until we were 6 months into this recession (July 08). So the fact that commodities were the last ones to join this recesssion leads one to think that they will be the last to appreciate during the recovery cycle. Financials mend first, then the consumer, then tech, then industrials and materials. Financials and consumers are the ultimate drivers of demand for materials...inflation is merely a by-product.

Is This Oil Price Manipulation?

peak oil or not, it is a fact that markets are much more "loose" than they were 6 months ago...more oil is above ground, in storage.

But what is bothersome isn't necessarily the absolute price level, but rather the volatility that shows 5-10% daily swings in the price of WTI...we were told (via the numerous congressional hearings) that this sort of volatility was supposedly only a phenomenon in a "tight" market. It seems like volatility has only increased as markets have become less "tight."

Again, it seems like 1-2% moves are now the exception, rather than the rule. The day the US invaded iraq (for the first time) oil went up 5-6%...to tell me that virtually no news today is worth a 10% daily movement is way too much to ask.

With considerable slack in the markets, yet heightened volatility also present, it makes me wonder how big of an impact specs are having on the markets. USO and ICE were not around in the early 1990's: given that we have almost as much supply slack as 1990 and an even worse demand situation, the only thing different is the presence of massive spec capacity. this slowdown really pulled the curtain back on this destructive mechanism that seemingly magnifies every insignificant event 10-fold. and seriously, USO has 25% of WTI contracts outstanding...how has the CFTC done nothing about this!??

WTI and Brent Oil Prices Are Normalizing

Don't forget about OPEC. They are in massive pain given the cash flow they are giving up on b/c of production curtailments. Bloomberg quoted the Iranian Oil minister (see link below) the other day saying: "“I don’t believe we will go toward another production cut...In this meeting we will need to review the economic situation in 2009 and 2010." These are the guys that have been broken records when it comes to production curtailment.

Now, it makes sense that OPEC would show the most compliance early on. But as the world economy is not getting any better, and given that OPEC never diversified their respective economies (i.e. they are still 80-90% oil driven), it is conceivable that they start cheating to relieve the pain. So that is def. a risk that could provide the negative catalyst for another leg down.

here's the link: www.bloomberg.com/apps...

Trend Reversal in Oil

This is the fourth month in a row that oil is doing its head-fake. CL front month is caught in a feedback loop. The lack of storage capacity is at the heart of it. As expiry rolls around the front month contract sells off as nobody can take delivery (Cushing is full). The next month contracts get bought up on the roll and pop back to the fourties. Oil can't go any higher, otherwise everybody that has been storing oil will dump it, pushing prices back down. Its going to take a genuine demand upturn to eliminate the massive overhang of excess oil and break this loop (alternatively, the CFTC could actually enforce position limits on the USO wich holds some 60k contracts...the main offendor when it comes to distorting the roll)

Chesapeake Energy: Peaking for Now?

"Who to say that XOM or some other cash rich company won't swoop CHK up?"

Rex Tillerson, XOM's CEO, will actually say it: “There’s still a lot of settling out on valuations that has to happen,” Tillerson said. “I’m not sure the valuations have all settled out yet.”

www.bloomberg.com/apps...

Oil Prices Poised for a Big Rise by Year End

"That suggests that these oil traders expect oil prices in late summer and fall of 2009 to be much higher than they are today."


I think you are a little confused.

First of all, and as you illustrated yourself, futures prices are just spot prices multiplied by some discount rate.

They are NOT actual projections of what oil will be trading at in the future.

The discount rate is typically just a function of the cost of carry . 0.90 for storage is about right, but what you failed to mention is that financing is also another ~60-90 cents. $1.50 to 1.80 per month is more like the cost of carry these days, and as storage capacity becomes tighter, that will only increase -- and therefore, so must the spread between spot and futures.

Recently, though, we've seen the curve come in a little bit, but this has been rumored to be because of index rebalancing and retail money being put to work at the front end of the curve...but just as we saw during the past couple front months, as we get closer to expiry, the contango will again get steeper as positions in the front month are abandoned, given the dearth of storage capacity (e.g. Cushing). That will eventually work its way down the curve and pull those $50-$60 and $70 contracts down to spot levels.

My Problem with Chesapeake Energy's New Deal

"9-10% per year is pretty darned good these days!"

Keep in mind the notes were seniors (though, few can really borrow at reasonable rates with anything less than senior)

"Bro: CHK's bankruptcy potential is highly over rated. Looking at the value of the underlying assets - I'd say they are safe"

Still, I'd like to see CHK IR release some sort of stress test scenario showing what happens to their capital structure at $3 and $4 nat gas.

My Problem with Chesapeake Energy's New Deal

"The market wants them to "really" live within cash flow. I don’t think they want to believe that."

Excellent point. I think its a symptom of an ideologically driven CEO/management. This sort of denial is absolutely devastating for shareholders. Steve Jobs (i'm long aapl), John Mackey (WFMI), Bernie Ebbers, Sandy Weill are/were all ideologues...denying what needed to be done, in favor of what they wanted to be done...all at the expense of shareholders.

BBG reported that CHK was a bankruptcy risk

www.bloomberg.com/apps...

It uses the Z-score methodology and, like any model, can't capture the entire essence of what makes a business tick.

either way, what i'm annoyed about is how mcclendon won't elaborate on what happens to the PnL and balance sheet if these nat gas prices persist or even reach 2002 levels. Yes, we know eventually supply/demand must balance, but the fact that he isn't candid about the potential for lower prices and refuses to plan more than a few quarters ahead, is disconcerting, to say the least.

no position